I just heard the umpteenth report from the mainstream media that denounces the GOP tax plan because it treats big businesses better than small businesses. There's only one problem with this claim: it's a lie.
Here's the basis for what the media is saying. A big corporation is normally a "C corporation" for tax purposes. The tax bill would cut the corporation's tax rate from 35% to 20%. Of course, as a C corporation, dividends paid to shareholders would then get taxed at least an additional 15%, and that rate will continue in place. That means that profits returned to the owners of the C corporation will be taxed first at 20% and then at 15% more. Small businesses are mostly "Subchapter S corporations." That means that they pay NO corporate tax, but the owners pay the tax instead by including the company's profits on their personal returns. For owners who are in the 25% bracket, that means a total of 25% tax paid on the profits instead of the 20 plus 15% paid by the C corporations. That means that most small businesses pay taxes at a lower rate than C corporations even after the big tax cut.
Remember also, that a small business could always convert itself to a C corporation if the taxes were lower on those entities. They get to choose which form to use.
Put all this together, and you find that small businesses are still paying tax at a lower rate than big businesses. The media story is just another tax lie.
Here's the basis for what the media is saying. A big corporation is normally a "C corporation" for tax purposes. The tax bill would cut the corporation's tax rate from 35% to 20%. Of course, as a C corporation, dividends paid to shareholders would then get taxed at least an additional 15%, and that rate will continue in place. That means that profits returned to the owners of the C corporation will be taxed first at 20% and then at 15% more. Small businesses are mostly "Subchapter S corporations." That means that they pay NO corporate tax, but the owners pay the tax instead by including the company's profits on their personal returns. For owners who are in the 25% bracket, that means a total of 25% tax paid on the profits instead of the 20 plus 15% paid by the C corporations. That means that most small businesses pay taxes at a lower rate than C corporations even after the big tax cut.
Remember also, that a small business could always convert itself to a C corporation if the taxes were lower on those entities. They get to choose which form to use.
Put all this together, and you find that small businesses are still paying tax at a lower rate than big businesses. The media story is just another tax lie.
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